Tokyo, Feb. 21 (Bloomberg) -- The dollar may fall after President George W. Bush said ``the day of freedom'' is near for Iraq, raising concern the U.S. will go to war without full United Nations support. The U.S. currency headed for its biggest weekly loss against its Japanese counterpart this year. It traded at 118.36 yen as of 2:10 p.m. in Tokyo versus 118.34 yesterday in New York. It was little changed against the euro at $1.0823, after having its biggest two-day decline in two months. Bush said the U.S. was prepared to ``act decisively in a just cause,'' spurring concern a possible war will slow economic growth and erode demand for dollar assets. A government report yesterday showing the U.S. trade deficit widened to a record also sapped demand for the currency, traders said.
``U.S. fundamentals aren't good, and the prospect of a U.S. war in the Middle East without much support isn't good for the dollar,'' said Paul McNee, chief currency trader at Australia and New Zealand Banking Group Ltd. in Melbourne. The dollar may weaken to $1.10 against the euro next week, he said. The Bush administration is preparing next week to introduce to a divided United Nations Security Council a resolution forcing Iraq to disarm. The dollar has fallen more than 8 percent against the euro since UN weapons inspections in Iraq began on Nov. 27 on concern a war will hurt demand for U.S. stocks and corporate debt.
Trade Gap
The U.S. gap between imports and exports of goods and services widened to $44.2 billion in December from the previous record of $40 billion in November, the government said yesterday. A broadening trade deficit signals companies based in Japan, Europe, China and elsewhere have more dollars to convert to their own currencies, cutting demand for the U.S. currency. The figure prompted some Wall Street companies to lower their forecasts for U.S. fourth-quarter economic growth, which the government will report on Feb. 28. Any decline in the dollar against the yen may be limited on concern the Bank of Japan will sell its currency to halt its 13 percent advance in the past year. A gain in the yen erodes the profits Japanese exporters earn on overseas sales. Finance Minister Masajuro Shiokawa said Japan may take action to counter ``speculative activity'' in the currency market. Japan's central bank sold about 700 billion yen ($5.8 billion) last month without announcing its actions at the time, in contrast with previous years.
Bank of Japan
``The BOJ has probably been in the market this month also, without saying anything,'' said Hidehiko Inamura, vice president of foreign exchange at Citibank NA, the largest trader in the $1.2- trillion-a-day currency market. ``The dollar's drop may be restricted on worries the BOJ may come in again.'' Japan's trade surplus probably widened 4.7 percent to 688.5 billion yen in January, according to the median of forecasts from 10 economists polled by Bloomberg News, as exports rebounded from an unexpected drop in December. The Ministry of Finance will release trade figures at 8:50 a.m. Tokyo time on Monday. Japan is relying on exports, which fueled a 0.5 percent economic expansion last quarter, to sustain a recovery from its third recession in a decade. The meeting of finance ministers and central bank chiefs from the Group of Seven industrialized nations starts today in Paris. Hiroshi Watanabe, the head of Japanese Finance Ministry's international department, said yesterday foreign exchange rates won't be a major topic at the meeting. Shiokawa said earlier this week he won't discuss the yen when he meets with U.S. Treasury Secretary John W. Snow before the meeting.
Security Council
The dollar still headed for a losing week after Bush said Saddam Hussein ``is not complying with United Nations demands to destroy'' weapons of mass destruction. ``He is actively deceiving the inspectors; he's actively hiding the weapons. The Security Council gave him one final chance to disarm and he's throwing that chance away.'' France, China and Russia, who with the U.S. and U.K. are permanent Security Council members with veto power, want more time for UN inspections and oppose military action. Prospects of a war have made some European and Asian investors cut back on the money they invest abroad, analysts said. The strategy has hurt the dollar because the U.S. counts on receiving about $1.4 billion in foreign investment a day to offset its deficit in the current account, a measure of trade and investment in the nation. ``The more uncertainty there is about Iraq, the more the dollar will come under pressure,'' said Marshall Gittler, foreign exchange strategist in Tokyo at Deutsche Bank AG, the third- largest trader in the currency market. In other currencies, the yen held at 128.10 against the euro from late yesterday in New York. The dollar was little changed at 1.3572 Swiss francs and $1.5940 versus the British pound. //www./quote.bloomberg.com